On the termination of a commercial agency agreement, one of the principal entitlements of the agent is indemnity. The value of this indemnity should be commensurate with the value of the agreement itself: however, what impact should the brand name of the products supplied have on this calculation?

While in English law this has not yet been fully determined, there are a number of precedents being set in other EU countries which could have important ramifications in the UK for future rulings.

The concept of indemnity in the termination of a commercial agency agreement derives from German law, where the case law dealing with indemnity calculation has subsequently become very well defined. In English courts, however, there has only been one decision relating to how an agent’s entitlement to indemnity should be calculated.

In this case, it was found that it is permissible to look at the practices of other EU member states when interpreting the Commercial Agents Regulations which govern the provision of indemnity.

In a recent decision in the German courts, an agent had their indemnity payment reduced by 25% as a direct result of the perceived value of the brand name of their principal. In the view of the court, as the principal’s brand name was so well-known and so respected that the agent’s job of selling the product was rendered 25% easier, as the products effectively “sold themselves” to a degree.

Applying this kind of reduction to termination indemnity to take into account the perceived value of a particular brand name is common in several EU member states. The tendency of consumers to gravitate towards particular brands is known as the “suction effect”, and has been a recognised factor in indemnity calculations in German courts over the last 10 years.

Although there is no precedent in English courts, there is equally no reason why a principal should not raise the “suction effect” argument in response to an agent’s indemnity claim.

In the wake of a recent ruling in the House of Lords regarding how compensation is to be calculated following the termination of a commercial agency agreement, it is likely that the majority of such agreements drawn up in future will provide for the indemnity to apply to avoid compensation payments.

With such an increase in indemnity provision imminent and the lack of English case law on the subject, it seems inevitable that the German model will be a major influence on the way this issue is treated in the UK.

If an indemnity arrangement is in place, the payment is dependent on and should reflect:

• Whatever new customers or increased volume of business the agent has brought to the principal and the principal continues to enjoy.
• The fairness of the payment with regard to the totality of the circumstances of the case.

The Commercial Agents Regulations do not go into detail as to how the actual value of the indemnity should be calculated. The EU has set out a formula, based on the German system, for how the calculation should be tackled.

As a result of this, principals with high “suction effect” products should seek to include indemnity provisions in future commercial agency contracts, as this means the popularity of their brand will be taken into account on termination of the agreement.

Conversely, agents dealing with such products should be aware that, if their agreement is terminated, they are likely to receive more through a compensation award than they would through an indemnity payment.

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